Markets

8 Arrested in Alleged Insurance Fraud

Massachusetts authorities, acting on insurance fraud indictments in California, have arrested executives at a company that helps courier services cut payroll expenses by making their drivers independent contractors instead of employees.

Thomas McGrath, the owner and president of Braintree, Mass.-based NICA Inc., was arrested by state troopers Wednesday along with seven current and former employees on charges of defrauding California's workers' compensation insurance fund, said Ernie Marugg, a San Diego County deputy district attorney.

Each was charged with 50 counts of conspiracy, fraudulent purchase of workers' comp insurance and the filing of false claims for benefits, Marugg said. All eight are free on bond pending an arraignment in San Diego County Superior Court sometime this month.

The claims ranged from a few hundred dollars to more than $100,000 and involved payments for medical care and temporary and permanent disability benefits.

Prosecutors allege that the claims violated the state's insurance laws because the couriers didn't work directly for NICA. If convicted on all counts, the suspects could be sentenced to as much as 59 years in prison and fined $1.2 million, according to the San Diego County district attorney's office.

Among those indicted along with McGrath were NICA Chief Operating Officer Andrew Rogantino, Controller David Kenyon and Western Regional Director Timothy Bergin.

Calls to McGrath and the others were referred by NICA to attorneys, who did not return telephone calls seeking comment.

NICA helps courier companies make the switch by providing payroll services, so-called occupational accident insurance and liability coverage. NICA said late last year that it served approximately 400 courier companies with 16,000 drivers in 42 states. About a third of its business is in California.

The charges arose in part from an ongoing investigation of NICA by the California Department of Insurance and the California Employment Development Department. In October, agents of the departments served search warrants on NICA's offices.

The investigation is part of a crackdown by state regulators on courier companies that avoid paying workers' compensation and unemployment insurance premiums by reclassifying their drivers as independent contractors.

The probe began in early 2003 and so far has assessed more than $37 million in back taxes and penalties against 153 courier services.

Targeted companies include a subsidiary of United Parcel Service Inc. and smaller firms, some with as few as two dozen drivers.

The controversy over whether to classify couriers as employees or independent contractors has split the industry.

Employers that continue to provide their drivers with workers' compensation coverage and unemployment insurance contend that they're losing business to competitors that switched to the contractor model with the help of NICA and similar companies.

Courier companies that make their drivers independent contractors can reduce payroll expenses by as much as 40%, regulators say.

State officials say such companies have avoided paying the state more than $100 million in payroll taxes and workers' compensation premiums.

The criminal indictment in San Diego is NICA's second run-in with prosecutors.

McGrath and his company were convicted in U.S. District Court in Boston in 1997 on multiple federal fraud charges.

McGrath and NICA paid $133,000 in fines and restitution, and McGrath spent five months in confinement and five months in home detention.

NICA currently faces a wrongful death lawsuit in New Mexico over a fatal motor vehicle accident involving a courier service driver affiliated with NICA.

A second action filed in March in San Diego County accuses NICA and other defendants of violating California's Unfair Competition Law.